Every economic transaction involves some degree of trust. Trust affects everything from personal relationships to global economic development. For example, when you purchase a product, you are trusting that it will work as advertised. As part of the buying process we often evaluate the person on the other side of the counter for a sense of their trustworthiness to help us make our decision. Trust works as an economic lubricant that affects everything from personal relationships to global economic development.

2. What is the difference between trust and trustworthiness?

To trust someone involves taking a risk, as you are letting someone else impact what happens to you. Trustworthiness is the trait of deserving trust or confidence. In an economic transaction, the initiating party offers trust while the providing party earns trustworthiness by delivering a good product. In this sense, trustworthiness is the partial reciprocation of trust. (see trust animation)

3. How do you measure something as complex as trust?

In our experiments, we recruit students and pay them $10 for showing up. They then take seats in a large computer lab where they are matched up in pairs. This is done completely anonymously so that no one knows (or will ever know) who the other person is in his or her pair. One half of the then have the opportunity to send none, some, or their entire $10 show-up fee to the other person. All participants are told that what ever they send will be tripled. So, if $4 were sent, the other person would receive $22 ($4 tripled, plus the $10 show-up fee the second person receives).

Next the second person in the pair receives a message telling them the amount sent to them. They can then choose to send some amount back to the first person, or just take the money home. In one of our studies, 85% of the first decision-makers decided to send some of their money to their partner, and 90% of the receivers sent some money back.

4. How did you get interested in the neurobiology of trust?

I wanted to understand the relationship between trust and economic development, so I began building mathematical models of trust. These did a good job of explaining how increasing levels of generalized trust in a country correlates to higher standards of living. For example, surveys of trustworthiness show enormous differences across countries, from 3% in Brazil to 65% in Norway.

But these models were unable to explain how two individuals decide to trust each other. There was no human data that identified the neural mechanisms that permits each of us to do something that we do everyday, without ever thinking about it. This is why I started the Center for Neuroeconomic Studies.

August 26, 2004

The intersection of economics and neuroscience offers tantalizing potential for the advancement of both disciplines as well as being a new field of study in its own right: Neuroeconomics (click for previous neuroeconomics posts on Brain Waves)

To understand the ways that sensory input, choice, and decision-making occur in the brain, the researchers placed monkeys in a dynamic foraging environment in which they had to track the changing values of alternative choices through time. They found that a simple model based on reward history (that computationally is close to near-optimal behavior) can duplicate this behavior and that neurons in the parietal cortex represent the relative value of competing action predicted by this model.

This line of research has broad societal implications, especially for those who believe we can significantly enhance human performance via neurotechnology. Note the fact that natural monkey behavior correlated well with near-optimal computational models. If it becomes possible to not just enable individuals to achieve a more balanced set of cognitive, emotional and sensory acuities that match the high end of natural performance, but to actually go beyond these bio-evolutionarily defined limits, then we will surely be heading towards a neurosociety where we will be faced with a new driver of social complexity that I call the "perception shift dilemma."

NOTE to email readers: Over the past two months, over 200 of you have joined Brain Waves distribution list. All of the pieces I write on Brain Waves contain a link at the beginning of the email that will take you to a website that not only contains the text of the article but usually five to ten well researched links to supporting information or my previous articles on a subject. For example, click on the above link to get to Brain Waves where there are links to other neuroeconomics articles, background on brain imaging technologies, and pieces I've written on perception shift. Thank you for your continued interest.

October 27, 2003

"The field of management has a long way to go...a better understanding of human nature (via neuroscience) will allow us to better target management tactics for specific situations, industries, and most importantly, individuals...Good managers are masters of situationalism (if that's a word). They can tailor their tone, attitude, strategies, tactics, etc. to the needs of the individual situation. I think in the future, management will move from being more of an art to being more of a science. In my opinion, management is still in its infancy."

I agree with Rob's assessment, and would add that the tools management will use to help them achieve their objectives will come via neurotechnology. Indeed, improving competitive performance via neuroceuticals will accelerate many aspects team performance by improving individual emotional stability and cognitive clarity. But the effects will go far beyond this: to the nature and shape of the firm.

By radically reducing the spatial transaction cost of finding and sharing knowledge, information technology has played an important role in flattening organizations down from their hierarchical, industrial predecessors.

Neurotechnology will also impact the "typical organization" of the firm in its own unique ways. As we learn more about the neurobiology of trust, how people make decisions, and the many other components of human social interaction that go into everything from contract development to dispute resolution, the emotional transaction cost of doing business will drop precipitously. In my research, I have come to believe that we will see a further flattening of organizational structures and the emergence of real heterarchies.

August 13, 2003

Elisabeth Hill and David Sally of University College London have recently completed a very interesting paper using the neuroeconomic method (real social interactions with payoffs) examining cooperation and fairness in adults and children with autistic spectrum disorder or the less devastating Asperger syndrome. The authors specifically are examining the role of "mentalizing" or "theory of mind" (the ability to interpret another's intentions) in strategic interactions. This is a nicely designed study using normal controls and several unrelated control tasks to determine subjects basal theory of mind and cognitive abilities.

Three games were used, the prisoner's dilemma (PD), the ultimatum game (UG) and the Dictator game (D) [I'll presume readers know these strategic social interactions, but if not, PD and UG admit equilibria with either cooperation or defection, and D measures altruism through gift giving.] Normal children had trouble finding the best strategy for all games, while normal adults quickly found good optimal strategies (and experimented on the parameters of them to further optimize). Autistic adults were about as cooperative as normal adults, and autistic children were similar to normal children. All children were more altruistic than adults.

One critique of this study is the (typical for psychologists) lack of use of monetary rewards to motivate attention to task. This study "paid" for performance with stickers for children and chocolate for adults. While these things are presumed desirable, their value across subjects varies (e.g. some adults don't care for chocolate). Cash is king here and has much clearly interpretable effects. A second critique is the very discursive writing of the authors that make it difficult to read (it is downloadable at www.ssrn.com).

Otherwise, this is a very nicely designed and executed study that tells us about social interactions in which the economically rational behavior requires little mentalizing ability. More sophisticated strategic interactions clearly do require this (e.g. see McCabe et al, "A functional imaging study of cooperation in two-person reciprocal exchange" Proc. Nat. Acad. of Sci., 2001).

Bottom line:many social and economic interactions do not require deep cognitive abilities, but are fairly quickly intuited using, e.g. market signals. This is good; it is why economies chug along with little intervention needed as market participants can figure out easily what is best for them (and need not have someone or group tell them what they "should" do). This study gives us an insight as to why this occurs.

August 11, 2003

Trust pervades nearly every aspect of our daily lives, yet the neurobiological mechanisms that permit human beings to trust each are not understood. In this research we find that when someone observes that another person trusts them, a hormone called oxytocin that circulates in the brain and the body rises. The stronger the signal of trust, the more oxytocin increases. In addition, the more oxytocin increases, the more trustworthy (reciprocating trust) people are. Interestingly, participants in this experiment were unable to articulate why they behaved they way they did, but nonetheless their brains guided them to behave in socially desirable ways, that is, to be trustworthy. This tells us that human beings are exquisitely attuned to interpreting and responding to social signals.

Our findings are even more surprising because monetary transfers were used to gauge trust and trustworthiness, and the entire interaction took place by computer without any face to face communication. Signals of trust are sent by sending money that participants earned to another person in a laboratory, without knowing who that person is or what they will do. That, is, there is a real cost to signaling that you trust someone. This research is part of a new transdisciplinary field called neuroeconomics that measures the neurologic processes involved in decisions involving money.

This is how the experiment works: People were recruited and paid $10 for showing up. Then they took seats in a large computer lab and were matched up in pairs, but this done completely anonymously so that no one knew (or would know) the other person in his or her pair. One-half of the participants (decision-maker 1s) then had the opportunity to send none, some or all of their $10 show-up fee to the other person in their pair. Whatever is sent is tripled. So, if $4 was sent, the other person would have $22 ($4 tripled, plus the $10 show-up fee the second person receives). The second decision-maker could then send some amount of this money back to decision-maker 1, but need not. This is how we produce a social signal of trust: decision-maker 1s only reason to transfer money to the other person is because he or she trusts that that person will understand why the money is being sent to them, and in turn will return some to them (be trustworthy). All subjects are told that the initial monetary transfer is tripled, and there is no deception of any kind.

After each person makes his or her decision, they are taken to another room and four tablespoons of blood were taken from an arm vein. Animal studies have shown that oxytocin, a hormone little studied in humans, facilitates social recognition and social bonding, for example, bonding of mothers to their offspring, and in some monogamous species the bonding of males and females in a family unit. Based on the animal studies, we hypothesized that what is happening in the trust experiment is that people are forming temporary social bonds with the other person in their pair. This is just what we found. The stronger the signal of trust, the more oxytocin increases, and the more trustworthy people are. This is surprising given the sterile laboratory environment of the interaction so that the effect of oxytocin on face-to-face interactions must be quite strong.

We also found that women in the experiment who are ovulating were significantly less likely to be trustworthy (for the same signal of trust). This effect is caused by the physiologic interactions between progesterone and oxytocin, and it makes sense behaviorally: women who are, or are about to be, pregnant, need to be much more selective in their interpretation of social signals, and also need more resources than at other times.

Standard economic theory (the Nash equilibrium) predicts that rational self-interested people should never trust another person, and if someone trusts you, you should not be trustworthy. Why? The Nash equilibrium says that if you are decision-maker 2, you should prefer more money than less so you should not be trustworthy (that is, return any money to decision-maker 1). Decision-maker 1 should realize this and therefore never send anything to the second person. Yet we see abundant trust in the lab and in daily life.

What the Nash equilibrium ignores is that humans, while certainly self-interested, also are highly social creatures and have brains designed to interpret social signals; in other words, we care what others think about us and our brains motivate us to take others into account. This could be called empathy. There is little evidence that creatures besides humans are empathetic, and indeed humans are empathetic even to strangers. This reveals an important role for the emotions in decision-making. Further, such empathy enables unrelated humans to live together with generally little violence in large cities and makes modern industrial economies possible.

My lab is now studying brain activation patterns when people receive signals of trust, as well as in the physiologic responses to trust signals in patients who have neurologic damage. Trust is an essential part of our daily lives, from walking down the street to driving to countless other daily activities, so that discovering the neurobiology of trust tells us something important about human nature: that we are so highly social that we pick up social signals of trust and act on them even when we are not consciously aware of these signals. Our brain acts as an internal compass that guides us towards the right thing to do.

Economics, at its core, sees human behavior as the outcome of a rational process of decision-making, wherein individuals weigh the costs and benefits of actions to maximize utility (i.e. happiness, profit). But as economists and the rest of us know, human behavior is not this simple. Instead outcomes are the product of an unstable and unrational complex of reflex actions, impulses, instincts, habits, customs, fashions and hysteria.

Since utility could not be measured objectively concepts like expected utility were devised to give economists an easy way to avoid the messy reality of human psychology. Economists then spent decades developing mathematical techniques to make economic predictions without having to measure thoughts or feelings directly.

Neureconomics is about to flip this age-old problem on its head. Today neuroeconomists are on the verge of being able to measure expected utility from the actual actions of an individual's neurons in a person's brain. No longer technologically constrained -- brain scanning technologies and clever experimental designs promise to transform economics into a science where one can develop theories that actually predict the neural correlations occuring in one's brain.

May 21, 2003

Standard economic theories rely on an implicit assumption that controlled, cognitive processes are the key to economic decision making. Yet..

We fear terrorism, when red meat poses a much greater risk of mortality. And, when it comes to asking someone out on a date, getting up to speak at the podium, or taking an important exam, our deliberative self uses diverse tactics to get us to take risks, or to perform in the face of risks, that our visceral self would much prefer to avoid. Perhaps the most dramatic illustrations of the separation of visceral reactions and cognitive evaluations, however, comes from the phobias that so many people suffer from; the very hallmark of a phobia is to be unable to face a risk that one recognizes, objectively, to be harmless.

Moreover, fear unleashes preprogrammed sequences of behavior that aren't always beneficial. Thus, when fear becomes too intense it can produce counter-productive responses such as freezing, panicking, or 'dry-mouth' when speaking in public. The fact that people pay for therapy to deal with their fears, and take drugs (including alcohol) to overcome them, can be viewed as further "evidence" that people, or more accurately, people's deliberative selves, are not at peace with their visceral reactions to risks. (from Colin Camerer's How Neuroscience Can Inform Economics, Caltech)

So, what decisions are made with total certainty? None, really. Clearly emotions influence economic decisions, a fact we've known for hundreds of years, but seem to have forgotten for a while.

The Philosopher Thomas Hobbes (1588-1679) was one of the first to describe how pain and pleasure were primary drivers of economic life back in the mid-1600s. Throughout his writings Hobbes tended to stress the role of pleasure as the prime mover in human action, describing the future hunger for pleasure as the primary determinant in human behavior.

Taking the view that pain, not pleasure, is the prime motivator of human action, the influential political economist John Locke (1632-1704) spent many years detailing how pain drove individuals and states to action. Starting with his second edition of the Essay on Human Understanding (1694), Locke described an uneasiness that spurs humans and governments to action.

But, thanks to Kahneman's and Smith's work the field of behavioral economics was re-born.

March 25, 2003

Why do we take risks? Why do we gamble? A brilliant piece of research reported in this week's Science describes a newly found population of dopaminergic neurons that appear to reward uncertainty; the activity of these neurons increases as the delivery of reward becomes less certain.

The authors propose that the activation of these dopamine neurons by uncertainty mobilizes attention, motivates risk-seeking behavior, and promotes learning about relationships between stimuli and consequences.

This new information is sure to add another piece of the puzzle for the decision theorists who continue to strive to integrate emotional and cognitive influences on choice and human behavior, a truly important and complex endeavour.